2022 (8) TMI 1548 - AT - Income Tax

Taxability of receipts towards sale of software products - royalty receipts - income from sale of shrink-wrapped software - Income deemed to accrue or arise in India - sale of copyrighted article OR transfer of copyright right - HELD THAT - As per latest decision 2022 (5) TMI 1660 - ITAT MUMBAI on the same issue and in assessee s own case for the assessment year 2017-18 held that receipts on account of receipts for software are not exigible to tax in India. Receipt on account of sale of Shrinkwrap software is not in the nature of royalty hence is not liable in India un view of the provision of section 9(1)(iv) of the Act as well as Article 12(3) of the Double Taxation Avoidance Agreement between India and U.S.A. income derived by the assessee from the sale of shrink wrapped software being a copy righted article would not be construed as royalty under the provisions of section 9(1)(vi) of the Act as well as Article 12(13) of the DTAA between India and the USA. Co-ordinate Bench of the Tribunal also held that assessee being a non resident company incorporated in the USA would not be liable to tax in India in respect of the receipt from the sale of software by treating the same in the nature of royalty and as such ordered to be deleted. - Decided in favour of assessee.

Issues Involved:

1. Jurisdiction and validity of the Assessing Officer's order.
2. Taxability of receipts from the sale of software products as royalty.
3. Application of retrospective amendments to the definition of "royalty."
4. Non-grant of TDS credit.
5. Levy of interest under sections 234A and 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of the Assessing Officer's Order:

The appellant challenged the correctness of the order passed by the Assessing Officer, claiming it was contrary to the principles of equity, natural justice, and mandatory provisions of the Income Tax Act, 1961. The appellant contended that the order lacked jurisdiction and was not based on the facts and circumstances of the case. The Tribunal, however, did not specifically address this issue in its judgment, focusing instead on the substantive issues related to taxability.

2. Taxability of Receipts from the Sale of Software Products as Royalty:

The primary issue was whether income from the sale of shrink-wrapped software should be treated as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the Double Taxation Avoidance Agreement (DTAA) between India and the USA. The appellant argued that the payments were for the sale of copyrighted articles, not for the transfer of copyright rights, as the end-users only obtained a right to use the software. The Tribunal noted that similar issues in the appellant's own cases for previous assessment years had been decided in favor of the appellant by the co-ordinate benches. The Tribunal upheld the appellant's plea, agreeing that the income derived from the sale of shrink-wrapped software should not be construed as royalty and directed the Assessing Officer to delete the impugned addition.

3. Application of Retrospective Amendments to the Definition of "Royalty":

The appellant contended that the retrospective amendment to Section 9(1)(vi) of the Act, through the insertion of Explanation 4 by the Finance Act 2012, should not apply to the definition of "royalty" under Article 12 of the DTAA. The Tribunal did not specifically address this argument but relied on precedent decisions that favored the appellant, indicating that such retrospective amendments did not alter the treatment of software sales as non-royalty income.

4. Non-grant of TDS Credit:

The appellant claimed that the Assessing Officer erred in not granting TDS credit of INR 8,84,58,733 as claimed in the income tax return. The Tribunal's judgment did not explicitly address this issue, focusing instead on the primary issue of taxability of software sales.

5. Levy of Interest under Sections 234A and 234B:

The appellant also challenged the levy of interest under sections 234A and 234B of the Act. The Tribunal did not specifically discuss this issue in its judgment, as the primary focus was on the taxability of the software sales income.

In conclusion, the Tribunal allowed the appeal, directing the Assessing Officer to delete the addition related to the taxability of software sales as royalty, thereby granting relief to the appellant. The Tribunal's decision was based on consistent favorable precedents in the appellant's own cases for prior assessment years.

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